If you are embarking on a new weight loss plan, it typically makes sense to pursue a mixed strategy of diet and exercise. If you are working to get your finances under control, you should look for ways to increase your household earnings and reduce spending. And so it goes, as we work to reduce carbon emissions from the nation’s power sector, pursuing a mix of supply and demand-side strategies makes good sense.

By Auffhammer’s Yoga Theorem (or, for you purists, Le Chatelier’s principle), the outcome of an emissions regulation that supports compliance flexibility will be less costly than a rule that limits states’ compliance options. Under the auspices of the Clean Air Act, the EPA has rolled out its metaphorical yoga mat and demonstrated some serious regulatory flexibility with its “outside the fence” approach to compliance.

“Outside the fence” basically means that states can look beyond their existing power plants for ways to reduce emissions cost-effectively. There is evidence to suggest significant untapped potential for cost-effective energy efficiency gains on the demand-side. Allowing states to use demand-side efficiency improvements to meet their compliance obligations has the potential to significantly reduce compliance costs. But with these potential cost savings come implementation challenges.

Factoring in the demand side

The EPA has defined a set of state-specific emissions standards based on a detailed assessment of state-specific “best system of emissions reductions” (more details can be found in the proposed rule). The EPA chose to define these standards in terms of emissions rates (i.e. tons CO2/MWh), although states can choose to convert their standard to a mass-based (tons of CO2) target.

A state that sticks with the rate-based standard would, for compliance purposes, calculate their emissions rate as follows:The numerator is simply the tons CO2 emitted from electricity generation. The denominator is the sum of electricity generation plus “negawatts”. In principle, negawatts represent the electricity consumption that did not happen thanks to a demand-side efficiency improvement.

Looking at this equation, a state could bring its emissions rate into compliance using supply-side strategies that reduce the emissions rate per MWh of electricity generated. Examples include supply-side operating efficiency improvements and increased reliance on less carbon intensive generation sources. On the demand-side of the fence, the state can pursue efficiency improvements in order to reduce the total quantity of electricity generated while increasing its negawatts.

How many megawatts in a negawatt?

Measuring carbon emissions and electricity generated is relatively straightforward because state-level emissions and electricity production are directly observable. In order to measure negawatts you need to construct a credible estimate of something you cannot observe directly: the “counterfactual” electricity consumptionthat would have been observed absent the efficiency intervention. Recent studies have looked into how projected savings from energy efficiency programs compare with realized energy savings in a variety of settings. Whereas some find that savings materialize as expected, others find that realized energy savings fall short of predictions (some recent studies can be found here and here). This can happen for a variety of reasons including mis-calibration of simulation models, sub-standard installation of efficiency measures, rebound, or a failure to fully anticipate free riding behavior.

If energy efficiency savings are over-estimated, the denominator in the above equation will be inflated. If a state’s emissions are divided by an artificially large number, the stringency of the rate-based standard is effectively reduced. In other words, too many emissions will be permitted per unit of electricity generated. Importantly, damages from these increased emissions will work to offset- or even eliminate- the relative cost-advantages of demand-side compliance options.

Measurement matters

The moral of this story is *not* that we should throw outside-the-fence compliance flexibility out with the bath water. The real punchline is that measurement matters. Over-estimates of energy savings make energy efficiency look artificially cheap relative to supply-side strategies. This mis-measurement undermines cost-effectiveness. Under a rate-based standard, it can also reduce stringency and increase emissions.

The EPA has indicated that it intends to develop guidance for evaluation, monitoring, and verification (EM&V) of demand-side energy efficiency programs for the purpose of this rule. This is a daunting but important task. The good news is that there is lots of work being done by academic researchers, governmentagencies, and other stakeholders to inform this process and advance the state-of-the-art. Providing clear guidance and resources to help states tackle these EM&V challenges will be key to realizing the real potential of outside-the-fence efficiency improvements.

3 Responses to Swapping negawatts for megawatts under the EPA’s proposed Clean Power Plan

Despite the good news you cite on work being done to improve EM&V for EE, what are the chances that utilities will use the gold standard (a randomized controlled trial) to measure energy savings that offset GHG emissions from power plants? For non-behavioral programs, which will most likely comprise the bulk of energy savings, I think that the chances are slim to none. If utilities do not use RCTs, what other methods are acceptable?

As someone who has spent several years contemplating efficiency and efficiency programs, I completely agree that estimating a reliable counterfactual against which savings can be measured is tough and technical work. However, beyond a certain precision, savings estimates are demonstrably arbitrary, with different (but reasonable) assumptions producing wildly divergent estimates. I think too much ink has already been spilled trying to precisely quantify the unquantifiable. It is an interesting academic topic, but a morass in the context of the adversarial determination of regulatory compliance.

What really needs to be examined is why policy makers continue to make policies that rely so heavily on theoretically perfect savings estimates and offer such attractive rewards for claiming significant levels of savings. In this case, the need to measure negawatts is brought about by the selection of an intensity criteria for emissions and the ability to trade estimated efficiency gains against real world measured combustion emissions. Given a stated national goal based on absolute emissions reduction targets, this is already a strange choice. Layer on top of that the irreducible uncertainties in determining the impacts of efficiency programs, and you have a complicated and sub-optimal system vulnerable to manipulation.

If the targets were based on absolute emissions, power plant emissions could be directly measured and plant efficiency, low carbon energy sources, and demand reduction could all contribute to reaching targets. All three strategies would be fungible, but with no trading required. What is so hard about that?